Friday, September 19, 2008

Toaster Economics

For months the Obama campaign has been claiming that McCain doesn't understand elementary economics. We believe we can make the same comment with equal validity for both candidates, and a couple of days ago Senator Joseph Biden proved us correct. As reported in a Yahoo! news service story, "GOP mocks Biden 'tax cuts for toasters'," during an interview on NBC's Today show, Senator Biden declared,
"Our tax plan would take that tax cut of another $130 billion that John [McCain] wants to give to people making over $250,000 next year, not let it go forward and give it to the middle class — the very people who desperately need it to stay in their homes, to buy food, to take care of the gas, to fill up their tank, to be able to go out and buy a toaster, to employ people."
To finish off the Democratic vice presidential contender, the Republicans posted a clip on YouTube in which the host, Meredith Vieira, asked,
VIEIRA: "Senator, you and Senator Obama are calling for tax increases on the wealthy. And there are many economists who say that that would hurt the economy even more."

BIDEN: "I don't know any economists who are saying that."
The article ended with, "Expect to see a list by the end of the day."

Yes, Mr. Biden, standard Keynesian economics says that if you want to spur economic growth, you give favorable tax treatment to the rich. This presumably gives them the incentive to reinvest their income, form new capital, and create jobs. Instead, Senator Obama wants to cut taxes for the middle class in order to make certain that they can spend more of their own income.

The only problem is that, under standard economic assumptions, the middle class will pay a lower tax rate on income they don't have because the jobs were not created to supply that income in the first place.

The key to this conundrum is the qualifier "under standard economic assumptions." The basic assumption underlying virtually the whole of the government's monetary and fiscal policy — which includes the tax code — is that existing pools of savings (by definition owned by rich) are absolutely necessary to finance capital formation that provides the great mass of people with wage system jobs. Based on the false assumption that the only viable means by which most people can gain income, Obama's tax proposal is grounded on the fear that if the savings (unconsumed income) of the rich are taxed away, they can't invest it. If they can't invest it, no jobs are created. No job creation means no income for the middle class.

What if the savings of the rich aren't necessary to finance capital formation? What if money could be created as needed for the purpose? What if — revolutionary thought! — money could be created for capital formation in a way that opened up ownership to everybody, not just the rich?

What if that's what we've been saying for years?

Tax projections we've developed for our Capital Homesteading proposal (admittedly broad) suggest that a "typical" family of four would pay no taxes of any kind — including the currently regressive Social Security and Medicare payroll tax — until aggregate income exceeds $100,000. Excluding from taxes $20,000 for a dependent and $30,000 for a non-dependent would leave enough money for a family to pay for their own health, education and well-being needs. Over that amount, a single rate would be applied to all income (and that means all, including dividends, inflation-indexed capital gains, interest, rentals and gambling gains) above. We estimate that this tax rate would be in the neighborhood of 48%.

This sounds high, but the current tax on dividends and capital gains of 15% plus the corporate tax rate of 35% equals 50%. "The rich" would get a tax break under our proposal . . . but the middle class would get a bigger one. Assuming (as recommended) that all corporate dividends are tax deductible at the corporate level, the rich would be paying less under Capital Homesteading than now under a tax structure presumably being run for their exclusive benefit . . . and benefiting everyone, not just the rich.

And what if there was a practical alternative way for financing all new capital formation needed to create private sector jobs to build a "green growth" future economy not dependent on the accumulated wealth of the rich? Under our proposed Capital Homestead Act, at current rates of productive asset growth, every American would receive an annual allotment of $7,000 of insured productive credit to invest in new shares that would be backed and paid for from future dividends.

The standard formula for feasible investing in new capital is to pay for capital out of the future earnings of capital, a formula that today makes the rich richer; under Capital Homesteading that formula can be made to work for the poor and middle-class. From birth to age 65, assuming a rather low pre-tax rate of return on corporate equity of 15%, tax deductibility of investment service charges, and a tax deferral of $1 million for capital accumulations (the "Capital Homestead"), an ordinary individual could accumulate nearly $500,000 in corporate equity or other qualified investments, and in that period enjoy dividend income of nearly $1.6 million in addition to wage income, which translates into after-tax ownership income of approximately $45,000 per year.

We could buy as many toasters as we want, to say nothing of bread to toast, as well as adequate other food, clothing, shelter, education, and health care.

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